In the face of high inflation and low deposit rates in the formal
banking system, large number of these families are trying to seek
higher yields, thus their money has find its way to the shadow
banking system. As monetary tightening made credit less
available in the formal banking system, businesses are forced to
borrow from these underground credit system (which includes stuff
like loan sharks, pawnshops and others that we have be talking
about here time and again).

As these businesses start to fail and businesses owners start escaping because the
interest rates are way too high in these underground lending,
this is becoming an increasingly worrying development.
Although the current epicentre is in Wenzhou, but these
activities exist everywhere in China.

Last week, Dong Tao of Credit Suisse wrote in a note that the
underground banking system is a time bomb, and pose a potentially
more serious problem to the Chinese economy. Not only it is
largely unregulated, the size of it can be :

We consider the informal lending market as the most likely
short-term time bomb for the Chinese economy, possibly more
abruptive and explosive than the local government debt situation.
Given its underground nature, it is unclear when this time bomb
may explode, but something is likely to happen over the next 12
months. Either Beijing takes pro-active and decisive measures to
deal with the issue, or a mini-credit crisis is likely to emerge,
in our judgment.